A Study on The Effect of The Cost of Capital of Company Due to Implementation of The Integrated Income Tax
Prof. Yung-Sen Wu
There are three major sources of funds in a company：(1) issuing debts (2)issuing new shares (3) receiving cash from operation.Companies must pay fixed interests to bondholders. Although a company doesn’t have obligation to pay specific dividends for shareholders, shareholders have privilege to ask their company to pay dividends. Therefore, it is a company’s duty to pay cash for shareholders. Companies pay nothing for the cash that companies retained, but companies require to bear the opportunity cost of these funds. Hence the cost of capital for managerial operation is the total of interests, dividends of cash and the opportunity cost of retained funds. Our government modified the law of income tax in 1997, it eliminates double taxation by implementing the integrated Income tax system. It integrates profit-seeking enterprise income tax and individual income tax. The most important effect of this reform is that it changes company’s expense of tax. This change makes the variation of cash’s inflow, and it causes influence on financial principle for dividend. This paper analyzes managerial reaction when the integrated income tax is implemented. We assume that the objective of a manager is to make more profits for his company. We build and compare the numeral models of cost of capital after implementing the integrated income tax with reference to valuation model and the propositions that MM published in 1963.There are four conclusions in this study. Firstly, this reform affects the cost of capital for managerial operation through different numbers that a company can distribute to shareholders or to be retained. Secondly, dividend’s distribution will influence the financial policy after implementing the integrated income tax. Thirdly, owe to the modification of No.42 of income tax law, the difference of tax of investment’s income is eliminated. Lastly, the real benefits from exemption and credit against the profit-seeking enterprise income tax payable by the law of Incentives for Upgrading Industry will reduce, due to the provision of adding 10% corporate income tax surtax.
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